he did get some extra money in the latest budget deal for early childhood education in head start. under sequestration, a lot of these programs were getting cut. progressive democrats insisted and went to the mat on that issue and got more money for early child education. there is not money for everything right now. host: i want to ask about the politics. many republicans are departing from the state of the union response script. and once careful response to be as uniform a message as possible is given away two free agencies. host: talk about --

guest: which ones is the question. this reflects accurately the state of the republican party right now, which is divided into itself. you do not need a bunch of disperate state of the union responses to know that. look at the republican members of congress who are getting primaries. mitch mcconnell has incredible challenge from a tea party member. you have the tea party response. rand paul is giving the rand paul response. there is the official republican response. let's start with rogers. not the only woman but the highest ranking. she is from washington state.

i think the republicans are open she can speak in a real way into the camera and to american people in response about home issues. she just gave birth to her third child as a member of congress, which is a record, i think. she is a mom and a repeated mom as a politician. that is the official response, to the one they would like to break through the most. the others have been pivoting off of the political debacle, at least for moderate voters. pivoting off that and starting to talk about other issues besides the affordable care act and obamacare all the time. lee has given a couple of

speeches to solving poverty and income levels. most of the nuts and bolts will not surprise you -- low taxes. lee has been pivoting off that a bit. on cruz, there is another renewal of the debt limit coming up in the next couple of weeks. maybe by late february congress will get to debate this. we have been around this track twice already. twice they have raised the debt limit. major confrontations and potential defaults. looking to credit rating agencies. what is going to happen with the value of u.s. treasuries? mitch mcconnell asked yesterday on television whether they would demand spending cuts in exchange for raising the debt limit.

he did say republicans would demand some types of policy changes to go along with the debt limit. that language is loose. that is not saying we demand dollar for dollar spending cuts. but ted cruz remains steadfast that the debt limit should not be raised without spending cuts. he can make it difficult for mitch mcconnell to make a deal. issue.d complicate he host: john from atlanta. caller: how are you doing? they should call the pinocchio awards. nancy and harry sing a song. it may be -- i think the mentor

could do the carlos sr. and jr. performance and that should be transparent. thank you. guest: umm -- jokey and sarcastic, i guess. i think he was referring to the nancy pelosi and harry reid. if they all got on stage together, something i would watch. caller: hi. yes. i do not care -- the woman called and said barack obama is half white. maybe she needs to go down to the senate floor and let them know that. they fight this man on anything he has to do. for all the good he has done, does he get credit for any of those things? no.

but for any new thing, social security, some moment in cincinnati, barack obama. they are going to fault him and are not going to work with him unless he signs his executive order. those congressmen that are collecting funds on that, they should not be allowed to. is serving in the congress. they want to cut from food stands and that is a crying shame. and i feel for our president. any time a white man takes the oval office, i think things will go back to the way the tea party wanted. guest: the president is frustrated with congress, without a doubt. plenty of reports that in his

private meetings he expresses his frustration with the state of relations with the congress. his relationship with a lot of congressional democrats -- this is a convoluted problem. the opposition strategy the republicans have taken on since early 2009 is a part of it. congressional relations have not been very good. in terms of subsidies in the farm bill, one of the programs that is getting cut in the farm bill is direct payments. a lot of farmers get taxpayer money based on how much land they have. it is designed to support farmers when crops are bad.

that program has been seen as money going out to people who are wealthy anyway. the formula is changing in a way that is supposed to be more sensitive to the realities of farming. direct payments largely out the window. host: our guest this segment is todd zwillich. our next caller is kimberly in washington, pennsylvania. caller: good morning. i have two concerns. with the obamacare, the health care -- host: go ahead. caller: until we get a cap on the cost of everything, there is not any kind of insurance that will be able to help us. i have breast cancer and trying to get my five year survival rate clearance from my

oncologist. he wants between 86 dollars and $414. i work part-time. i live with my daughter. i am baffled. why is it from $86 to $414 just for a meeting with the doctor? as far as the race thing. hillary tried to get us health care. she was white. it is like a scam. somebody tries to take from them and they are going to fight them. guest: you would have to know more about the caller's income situation.

$377 a month, you would qualify for medicaid in any state in the country. if not medicaid, premium subsidies under the affordable care act. she mentioned the issue of cost. one of the main criticisms of the affordable care act is there is not a lot of cost control. it brought a lot of people into the system but didn't have a lot of downward pressure to lower health care costs. more people are insured, it spreads the risk, if you can get those people to sign up. there are a lot of price controls or price caps. members of congress are talking about bringing back some price controls on prescription drugs that used to exist, to try to lower the government's cost but the public cost on

pharmaceuticals. that may go somewhere in the next couple of years. not a lot of price controls. host: next call on the line for democrats. caller: i heard him talking about the president's executive powers. how far can the president go with that? we know we have a congress that doesn't do anything. it looks like the next year or two we will depend on how much he's able to do. i will take my answer off the phone. guest: the president can exercise executive power in anything in the executive. we talked about new requirements

for federal agencies to contract, to favor companies increasing the minimum wage. that could be a policy the white house puts out. he can do plenty with the military. the pentagon. he cannot raise taxes or revenue or spend new money. he cannot pass new laws. he can bring others to microphones who want to be seen next to him or threatened those who don't. that is the bully pulpit part. the president does have some power in this regard. it remains to be seen exactly how effective this can be in how effective the president is at how much he is bringing the country forward in the time of stagnant wages. we will see about that.

host: you mentioned the farm bill. what else are you expecting? guest: the farm bill will be the most important thing, if it does come to a vote. that could be up as soon as wednesday on the floor. it would have to come out today. unemployment insurance failed before the break to get 60 votes. republicans do not vote to extend benefits after bipartisan discussions broke down. that discussion will continue. democrats feel that is dovetailing with the message the president will have. they do have one or two republicans with them. there is a little bit of bipartisanship there. the house will vote on an abortion bill. there is already no federal

funding allowed for abortions as part of spending bills that went through about 10 days ago. this provision has implications for here in the district of columbia for how they can spend its own local money on abortion services and family planning. one hearing that i will be watching is in the judiciary committee. it could be wednesday or tuesday. eric holder comes in for an oversight hearing. there will be plenty of issues discussed. there have been a couple of things that the attorney general will be asked about. nsa surveillance for sure. the president announced his potential policy changes and some policy shifts on data collection from the nsa.

he said he was tasking the attorney general to come up with new recommendations -- the president said we will still have access to this type of information. but members of congress and the white house have come to understand because of revelations of edward snowden that he cannot continue as it was. the attorney general is tasked helping the president figuring where should this data live? should it stay with the nsa? live in some other place? some other place in the cloud or some third party has a lock and key and you can only search it with a court order from the fisa court.

complicated issues and others. that is one thing the attorney general is going to be asked about. edward snowden remains in russia. the president and attorney general have been asked -- there is a criminal investigation. about how snowden should be treated as a whistleblower. amnesty oro deserves no amnesty? tried in courts should he come back to the united states? i would imagine he will be asked about that. host: i want to stay with surveillance. the president just gave a sweeping speech about the nsa. guest: i would be surprised if he spent a great deal of time on it in detail. i would not be surprised if he mentioned it in passing or parenthetically. the president devotes part of

the speech to national security. i am sure he will talk about iran. he probably has to mentioned syria. under the national security tent. it would be hard to give a state of the union speech and pretend the nsa issue is not out there. speech a major policy week ago. probably not a lot of time. host: texas, jeff is on the line. caller: good morning, y'all. how is it going today? my comment is on the minimum wage hike. i am an employer and own my own company. i just got done with my taxes. eight dollars an hour for my apprentices.

with unemployment insurance, i am paying $14.46. if they make me raise my apprentices to $10 an hour, i will have to drop my apprentices because i'm not going to pay somebody that does not know the job that much money. i am an employer with under 50 employees. all of my employees are dropped to obamacare. this year they're going up close to 50% in some places and almost 25% everywhere. the normal rise of 10 percent or under is not a big of deal as what has risen now. i am going to have to drop my employees because of the wage. i have to drop them and put them to obamacare. there is no way i can afford to pay these high rates.

that is my problem. if you have a solution, thank you very much. guest: the crux of the debate of the minimum wage debate. individual employers bristle at the prospect of being forced to raise wages for people at the bottom of the income scale. organizations in washington -- they are not a traditional our power player with congress. it is a separate kind of republican politics. they have been sympathetic. they will make it again if the president tries to legislate on the issue of minimum wage. the caller is correct that it would present difficulty for him and his business.

the counter argument is that as middle income and lower income people struggle, corporations are sitting on record amounts of cash that they are not putting back into the economy. a lot of that money is staying in new york and in banks and not circulating in the economy. raising the minimum wage is stimulative because people at the bottom of the income scale do not save a great deal of money. what they do is they spend it on rent, groceries, clothing. the idea is it is stimulative. if you are in retail, having more people walk around with more money in their pocket is good for everybody.

that is the counter argument. and the classic tension. host: just a couple of minutes left this morning. todd is on our line for democrats. caller: hi. i wanted to make a comment about what mr. zwillich said about the president and the executive powers. i guess it makes the president look like he's limited as far as what he can do. if he is limited, it should be blamed on the two parties, as far as what is happening in this country. there was a botched previous administration. they could take 8-10 years to get back. scenario?correct

guest: it is so difficult to say. there is the old saw about the ship of state, that it does not turn on a dime. the president has reminded the country that the state of the economy he inherited when he took office. we were already on a slide. the housing slide that took place after that and the worst recession in 80 years after that. any president would be having a difficult time in terms of policy and in terms of politics of getting out of this. republicans know that the president owns the economy. presidents who preside over bad economies tend to do poorly. there is a lot of unfairness on both sides of that.

but that is the way it is. that is the way it shall remain. the white house knows that. republicans are trying to narrow their message getting down to 2014. jobs and the economy are critical. employment is critical. message from the republicans runs into a loggerhead when the country does not see them cooperating with the president on jobs program and infrastructure spending. more important to republicans is obamacare. the bad rollout. callers who were frustrated with their employees, frustrated with sign-ups. the program is in its embryonic stages still -- i should not say that, it has been born. its infant stages.

republicans are running on frustration with the affordable care act. they are running ads against democrats who support the affordable care act. mark pryor in arkansas is trying to defend his vote on obamacare. he's not the only one. it partly goes to tell you, washington is an ecosystem. everything is connected. like in the jungle. maybe it gives you an idea as to what republicans are eager to get something passed on immigration. they did poorly with latino voters. we can focus on this one issue that will help us the most, the affordable care act. host: we will leave it there. our guest has been todd zwillich.

thank you for being with us this morning. guest: my pleasure. >> billy house is joining us. he is with "national journal." radel.as news about trey what has been the response to what is the trusses to replace him? and what is the process to replace him? is been pretty quiet. the governor has set up a special election. there are only two or three candidates including connie mack. it is increasingly -- is unexpected. before the state of the unit, get the bad news out.

>> you mentioned president obama's state of the union address before congress. you wrote about a memo that republican leaders in the house sent to their members about the health care law. what are some the details and what are its implications ahead of the speech? >> nsc memo sent out by the --ority of californians suck the majority leader of california. on the undoing or dismantling of the affordable care act. statistics on how many bills they voted on and how many parts are defunded. the upshot is the memo states that the democrats have started voting for some of these. is the yearso

continues, momentum is building on democrats to go along with republicans. clearly, this process will continue for house republicans and the key issues. >> the house expected to begin debate on a bill to ban federal funding of abortion. what details can you share on that and how much support does that measure have from how democrats? >> no support from house democrats. maybe a handful. to create nothing else but to the perception of these health-care exchanges and the peopleble care act, give other charges or fees that would go to abortions. whether or not it is all true or not, most people would want to make sure that it does not happen.

[indiscernible] it is more every messaging. it is one that has written the democrats. >> one of the of issues is the farm bill we can see on the floor. what is the status? >> that is something breaking right now. it appears we were told a couple of minutes ago that some congress members at 6:30 p.m. , it will get bipartisan support. and this could be voted on in the house of by wednesday morning. that is a key deadline in terms of being done this week. house republicans will vote for strategyr annual

meeting. they began their first session out there. that is wednesday morning at the latest was a >> you mentioned the retreat. what are some the key issues they will be grappling with? >> what they want to do with the debt limit and there's a lot of talk. some republicans want to make it a big issue and hold out for some concessions whether it might be -- the biggest issue might be the announcement last that he speaker boehner will announce immigration reform principles whether that goes beyond some of the rhetoric that republicans have already said, we do not know. the notion of there could be movement toward immigration reform within the conservatives conferences could be clouds

gathering at can bridge where the retreat is being held. where exactly they want to go with immigration. >> billy house is covering the house. is your publication website nationaljournal.com. , the federal reserve response to the financial crisis. as secretary donovan on reducing homelessness. a debate on u.s. gun policy. >> coming up on washington journal, a preview of the state of the union address. walsh.st is ken enator chaffetz s and bernie sanders.

tweets.ur calls and live every morning at 7:00 a.m. on c-span. subcommittee will resume the next round of talks on iranian nuclear programs. nationaldeputy of the atomic agencies to live coverage starting at 2:00 p.m. eastern on c-span 3. c-span, we bring events for washington directly to you put you and the road at congressional hearings, white house events, and offering come pleaded gavel-to-gavel coverage all as a public service of private industry. we are c-span, created by cable tv and district and funded by your local provider. was -- like us on

facebook. >> a discussion about how the federal reserve has changed since the financial crisis. this was part of the opening of the brookings institution center a monetary policy. it runs about one hour and 10 minutes. >> thank you for those kind words and for making this possible. i want to thank the panelists up here and those who will speak later. they put a lot of work into writing papers for this thing and then we tell them, ok, talk about it in 10 minutes. i want to make sure we do -- everyone is aware we have copies of these outside and on our website. we will try to do them justice in the short time that we have, we will not succeed.

there is much more work to do. our first paper is about the extraordinary period in monetary policy we have been through. it was inconceivable 10 years ago that anybody would have thought that the fed cut interest rates to zero in 2008, the discussion is will it be zero and 2015 or 2016? i don't think there is anyone better suited to talk about these policies then john williams, president of the san francisco fed, who did some of the fundamental research that was relied on when we discovered we were going to be faced with a threat as bad as the great depression. >> thank you, great to be here, a wonderful event and i'm honored to be part of it. i was given the task to talk about monetary policy at the federal reserve. specifically around the issue of

the zero lower bound. the zero lower bound is basically the constraint that you cannot lower nominal interest rates much below zero. it was an issue that economists and other central-bank economists had studied extensively in the 1990's and before the crisis. one thing that spurred the research was the experience of the last decade in japan and the experience of the great depression in the u.s. economists thought hard and studied how big of a threat was the zero lower bound, what were the implementations for monetary policy. at the time, interest rates were well above zero, people thought it was an academic concern. research, which identified a number of issues, i highlighted three of them.

the first one was the fact that the zero lower bound is a real, practical concern. it is not just abstract, it is not japan being special or unique. it is an issue we should take very seriously. in the paper i did with dave from the board of governors, we said if you follow that taylor rule with a 2% inflation objective, you would hit the zero lower bound about five percent of the time. some estimates were higher and and somewhat lower. this is a very real, practical concern. most of the time, episodes of the zero lower bound were relatively mild, relatively short-lived, and the simulation we looked at -- you would get a zero lower bound for about one year. the effects of the zero lower bound would typically be mild. about once a century, you could have a much more severe

recession where the zero lower bound would be a bigger issue. the first conclusion was yes, it is a real issue. most of the time, not a dramatic, life-changing issue. the second conclusion from that period is that conventional monetary policy should be modified away from a taylor rule into something that took into account the lower zero bound. two conclusions, one was do not keep your powder dry. if you are in danger of a recession or deflation, cut interest rates quickly and aggressively, get as much monetary stimulus as fast as possible. the second was lower for longer, even after the economy starts to recover, instead of a race to raise interest rates, keep

interest rates low. that commitment continues to add stimulus and reduces the risk of inflation, helping the economy grow faster because of the zero lower bound policy. there were these two strong conclusions, one is act aggressively going in and act slowly coming out. the third conclusion from the research was really around a truly unconventional monetary policy, quantitative easing. they still hold to the name large scale asset purchasing, or lsap. think of having a translator in your mind, when i say lsap, say qe. could we use asset purchases and intervene in foreign exchange markets, we did a lot of research on that, very academic and analytical.

how that might help lower interest rates and improve financial conditions when the short-term interest rate is at zero. there were papers on how that could be done and a useful complement to conventional policies. for the last seven or eight years, we have gained enormous experience, both with these policies and with the lessons from that research. my paper says what did we learn relative to 2006, what did we learn you go and what did we observe out there. the first part of the paper, is the zero lower bound a big problem? looking at the world where all the central banks have had interest rates at zero for five years straight, it is clearly a much larger problem. why, what did we miss? we thought zero lower bound was going to be a modest constraint

most of the time. in fact, it has shown to be globally a huge issue. one of the lessons i try to emphasize in the paper is that we were fooled by the postwar u.s. data, especially the great moderation, a relatively small sample of data, where we did not have large shocks, we had a financial system, due to the lasting effects of the reforms from the 1930's, the system was pretty strong. the economy was behaving extraordinarily well. when you analyze what are the tail risks in an economy where nothing bad happens, it is surprising that you come to a conclusion that nothing bad ever can happen. ken rogoff has written quite a lot about this, you need to study history. you cannot just think that what

happened in the 1930's or what happened in other countries is irrelevant for the u.s. there is an issue of how do you weigh the evidence from 100 years ago and from other countries, that is hard. one of the things i show in the paper that was illuminating, if you look at the data from the postwar period, the probability that real gdp per capita would fall as much as it did in 2008, it would happen every 400 years. it never fell more than 3% in the years before the recession. in 2008, it fell 3.7%. looking at data, you come to a different conclusion, real gdp per capita fell more than 5% of the time, without once every 20 years you expect to see a major recession like 2008.

you cannot be looking at 25 years of the great moderation and draw conclusions. that was one of the conclusions. a lot of our macro economic research and models we use really do not help us think about tail risks or things we have experienced. the other parts, looking out for guidance and quantitative easing. in the opening remarks, one of the lessons from the research was that if you cut aggressively and keep lower for longer, you can offset the effects of the zero lower bounds. we did see central banks cut aggressively, maybe 10 countries cut rates aggressively in 2008.

much more challenging was doing the lower for longer. somehow convincing financial markets we are going to keep rates lower for longer. in the u.s., i talk about this in the paper, up until august 2011 fomc decision to put out the day to keep interest rates at zero till may 2013, until that day, market and were that the fed was ready and raring to go to raise interest rates within 3 quarters or four quarters. the forward guidance that was instituted at that point and has been expanded upon, fundamentally shifted expectations about monetary policy. moving expectations about raising rates by at least a year. it has shifted how markets perceive what the fed's function is. since 2011, interest rate expectation and behavior has been much more consistent with

what our expectations are, you are not seeing the market expecting us to raise interest rates in the next year or so. you can see this in terms of how the markets respond to news, in terms of surveys and market prices. it took quite a while for the fed to go to explicit forward guidance, it seemed to have a major improvement in helping the economy improve economic conditions. finally, on qe, that was interesting. we had very little knowledge of what the effect of qe would be on financial conditions of the economy. there were few papers going back to the 1960's. this was flying blind, we had some analysis based on specific circumstances. since then, i list maybe two dozen papers that have been written based on what has happened in the u.s. and the u.k. we have learned an enormous

amount about how asset purchases affect the economy. my point is we still don't understand a lot of it. clearly, the evidence is when the fed and central banks do asset purchase programs, it affects long-term yields, it lowers interest rates. $600 billion for the u.s., the balance sheet seems to lower long-term treasuries by 15 to 25 basis points, a lot for monetary policy. there is a lot of uncertainty about how it works. is it really signaling future policy action? is it really an imperfection to the financial market that allows the fed to buy assets and affect the price? we have a lot of uncertainty about the size of the effects. again, macroeconomists have ignored the whole aspect of imperfect information.

our macro models that we rely on to see the effects of policies and calibrations of policies have very little to tell us right now about quantitative easing. a number of economists, clearly if you are a phd student, this is a great topic. has been working on developing models that allow us to think about qe and estimate its effects, thinking about policy with that. that is in its infancy, we are having to use the models we have. i want to emphasize, it is clearly at work, it is a very blunt tool. >> we came into this crisis, into the global financial crisis having studied these issues about what should monetary policy due at the zero lower bound. we learned a lot from that about

the unconventional tools we could try to use. we have learned about how effective they are. we have learned a lot about some of the challenges with these things. forward guidance is great in textbooks, always telling us how we could do forward guidance like in books, we would be golden. explaining to the public and markets what monetary policy may or may not do is very complicated and often prone to misinterpretation. quantitative easing has a lot of concerns about unintended consequences, leaving us with some pretty big issues we need to think about for the next several years. importantly, then 2% inflation buffer that every central bank decided on. to give you a little bit of cushion in a deep recession.

is that really appropriate or properly calibrated given the lessons we have learned about the zero lower bound and the severity of the recent recession? we understand financial markets much better. we think seriously about how the financial market reforms will change things. finally, the most interesting issue -- was this whole inflation targeting regime we have all agreed on, which has a lot of positive benefits, really not as well suited for the zero lower bound condition as some alternatives? such as nominal gdp targeting. i'm not taking a stand on those, changing the inflation target is the electric curtain rail of monetary economics. i am laying them out as issues we should think about. we need a lot of research and a lot of work on these are the next few years. >> we will poll the audience. answers to these of those

questions. [laughter] when we thought about who could comment, on this paper, marty feldstein came to mind. one of the few economists who has walked between policy and academic circles and is respected in both. and has views on whether the fed did the right thing. take it away. >> thank you. we have a very rich paper that is worth careful reading, i am very impressed at how well he was able to summarize it in the 10 minutes that david gave him. i did not get 10 minutes to comment, i realize that trying to do it in seven minutes, which was david's assignment, i better write it down or i would go on much too long. let me read what i wrote after i read the very insightful paper, dealing with the proper conduct

of monetary policy under the adverse conditions we have experienced since 2006. although we might hope that such conditions will not happen again, john presents persuasive historic evidence that such declines in aggregate demand are likely to recur. it is important that we learn from recent experience and consider alternative policies. the 2007 downturn was not only deeper and longer than the usual recession, but also different in its origin and structure. it was not caused by temporarily high real interest rates, and therefore could not be reversed by the fed's usual rate reduction. even at a near zero federal fund rate, the the recession persisted. the downturn was caused by mispricing the risks of assets.

individuals bought overpriced homes and banks gave high-value mortgages to individuals unable to repay them. house prices began to collapse in the summer of 2006, causing a massive fall in household wealth and in residential construction. banks and other investors bought overpriced sections of securitized subprime mortgages that collapsed in value, signaling the overpricing of risky securities. in many cases banks and other financial institutions could not even determine the value of their portfolio assets because of the lack of willing buyers and sellers. banks and therefore could not know the value of their own capital and could not judge the solvency of potential counterparties. the financial markets became dysfunctional and credit dried up.

the federal reserve and the treasury together acted very boldly to revive the financial markets. with a combination of asset purchases and guarantees that went far beyond monetary policy. although these actions succeeded in reversing the financial collapse, they did not reverse the economic downturn. the federal reserve also cut the fed funds rate to near zero in late 2008. too late to satisfy john's suggestion "to act aggressively and cutting rates when a sharp decline in output threatens." that would have implied cutting rates in 2006 when house prices began to collapse. the fed funds rate was still nearly 5% in the fall of 2007. in analyzing challenges of 2007

and 2008, it is important to go beyond simulations. traditional macro econometric models cannot begin to capture the problems in 2007 because they lack well specified financial sectors, let alone the securitization of mortgages and the widespread presence of off-balance sheet special investment vehicles. financial crises may not share the same features. although this meeting is about monetary policy, i think it is wrong to ignore the role of fiscal policy at the zero lower bound. conventional wisdom before 2007 was that cyclical fluctuations should be managed by monetary policy alone. because countercyclical fiscal policy is generally too slow to

react within the typical recession downturn. but in 2007, several of us concluded that current conditions implied that a fiscal stimulus was needed. unfortunately, the bush tax cut of 2008 was totally ineffective. a small, one-time rebate that households almost entirely safe. -- saved. the obama stimulus plan of 2009 probably dampened the downturn, but was too small and not concentrated enough on increasing government spending. so, with an inadequate fiscal policy, the fed was the only hope for stimulating the economy. with the fed fund's rate at the zlb, they shifted to unconventional policy of lsap's of government bonds and

mortgage-backed securities. john provides a review of the evolution of the short rate guidance. he concludes "explicit forward guidance can effectively anchor interest rate expectations out 2 years." i ask why is a two-year anchoring economically significant? the usefulness of forward guidance would be persuasive if it reduced the longer-term rates that are relevant for mortgages and equity prices. john reminds us that the standard textbook theory implies that lsap's cannot affect assets prices and interest rates. we know that that is wrong. the fed's massive purchases of treasury bonds and mortgage backed securities drove the yield to treasuries to just 1.7%

in may 2013. the announced plan to end the purchase program was enough to drive them rate back to 3%. john quotes research showing that $600 billion bond purchase in qe 2 lowered the unemployment rate by 1/4 of 1%. concluding in his remarks, "a great deal of uncertainty about the magnitude of these effects and their impact on the overall economy." missing in all of this analysis is a balancing of the potential output gains of lsap's against the risks generated by sustaining abnormally low, long-term interest rates. those risks include potential price bubbles in equities, land,

and other assets. portfolio risks as investors reach for yield was junk bonds, emerging market debt, i'm covered options, and the like. three, creditor risks as lenders make loans to less qualified borrowers, long-term mortgages at insufficient interest rates and so on. and four, long-term inflation risks as commercial banks acquire a large portfolio of low yielding assets at the federal reserve that could be converted to commercial loans. in his conclusion at in his remarks, john asks whether lsap's should be a standard tool in short rates are at the zero lower bound? i think it is, at best, too soon to tell. we will know more when we see the outcomes of the risks that they lsap's created.

if the economy now expands at a healthy pace, which i think we have a good shot at, we will not know what the risk outcomes would have been in a weaker economy. what is clear is that a balanced fiscal policy should be part of the response with the economy is stuck with excess capacity at the zero lower bound. finally, john asks whether it would be better to target nominal gdp or the price level or an inflation rate higher than 2%. i think any of those would be a mistake. although inflation is not a problem now, the time will come when the fed will want to limit or reverse inflationary pressures. experience and theory both teach us that it is easier to do that if the public understands that the federal reserve is committed to a consistent policy of low inflation.

flirting now with other, more ambiguous goals can only weaken future public support when the fed needs it. >> thank you. john, let me ask you to respond to two of the interesting points made. when you describe the history of monetary policy in this crisis, you did not mention fiscal policy. we know that fiscal policy was a big player, to quote ben bernanke, was "counterproductive." when we get to an episode like this, what is the right thing for the monetary policy to do. do you compensate for lousy policy and do more or do you say to authorities, look, we are doing this, publicly indict them for not doing the right thing?

>> i do not think fiscal policy was lousy, we had pretty sizable fiscal stimulus. i agree that more would be better. >> i am thinking more recently. >> ok, but in the depths of the recession, 2008, 2010, there was extraordinary fiscal stimulus that was helpful. the fact that we turned the other way is more negative. the way i think about this is from the point of view of monetary policy, you have to take fiscal realities as given and the political realities around us. we have to take it as a given that fiscal policy is doing what it is. we have to have monetary policy as best calibrated and we can to achieve our goals. i agree that the leadership can and should speak clearly and forcefully about the affect -- the beneficial effect of countercyclical fiscal policy, especially at the zero lower bound. i think that is a message that most economists would agree on. i think it is obviously logically -- it makes a lot of

sense. there is the reality, washington does what it does. we have to try our best given what -- the hand we are dealt.